Speaker A
[Music] Well, welcome to the financing sources panel night. We're going to explore where money comes from, what different institutional constraints are, and how you as an entrepreneur need to think about and do your research for that.
Panel discussion on financing sources for new ventures, covering founder savings, credit cards, friends and family, banks, and venture capital.
Key Takeaways
- Founder savings and cash flow are the primary funding sources for most startups.
- Credit cards and friends/family are common secondary sources before seeking institutional funding.
- Banks require secured assets, making them less accessible to early-stage startups.
- Venture capital is essential for companies targeting fast growth but involves equity dilution.
- New peer-to-peer and angel investment platforms are changing early-stage funding dynamics.
Summary
- Most young companies initially fund their ventures using personal savings and cash flow.
- Credit cards are the second largest source of capital for startups after founder savings.
- Friends and family often provide funding once personal resources are exhausted.
- Banks rarely fund young companies due to lack of secured assets required for loans.
- Venture capitalists provide growth capital in exchange for equity, important for scaling companies.
- Less than 20% of fastest growing companies in the U.S. take venture capital funding.
- Alternative funding mechanisms like AngelList and peer-to-peer platforms are emerging.
- Venture capital is critical for companies aiming for rapid growth and market disruption.
- The panel emphasizes understanding institutional constraints and researching financing options.
- Entrepreneurs should seek funding sources appropriate to their stage and growth needs.
Full Transcript — Download SRT & Markdown
Speaker A
that uh but and these are all what call Venture investment people that'll be on the panel tonight so before we launch right into Venture I thought it would be useful to look at a Kaufman Foundation video about where entrepreneurs get
Speaker A
These are all what we call venture investment people that'll be on the panel tonight. So before we launch right into venture, I thought it would be useful to look at a Kaufman Foundation video about where entrepreneurs get their money.
Speaker A
but they do the number one source they get money from is from their own savings whether it's a few hundred dollars or even thousands of dollars that's what we tend to tap first and a lot of companies don't get money from any other place
Speaker A
So we'll start off with that, and then we'll ask the panel to come up and get on with the evening. So give me a second to get this going. Most young companies need money, which may or may not come as a big surprise, but they do.
Speaker A
than half of young companies get all their funding from a combination of founder savings and then cash flow from the business and we're out of here next up on the list is another one that catches I think people by surprise and
Speaker A
The number one source they get money from is from their own savings. Whether it's a few hundred dollars or even thousands of dollars, that's what we tend to tap first, and a lot of companies don't get money from any other place.
Speaker A
where they tend to get money is from friends and family after I've tapped out my credit card and I've used up all my savings I turn to people I know and say hey will you help me and that's the
Speaker A
They get money from their own savings, and then after that, they're lucky enough to be cash flow positive, they're profitable. So we talk a lot as if all companies require all sorts of external capital, and the reality is that more
Speaker A
you have to think about the way Bank lending works and how shareholders want Banks to lend they want them to lend money against secured assets and young companies don't have any secur they have nothing to secure it against and the
Speaker A
than half of young companies get all their funding from a combination of founder savings and then cash flow from the business. And we're out of here. Next up on the list is another one that catches, I think, people by surprise, and
Speaker A
warranted you know your Googles and apples and fedexes and many others all have Venture Capital money inside of them but the reality is is and this is from Kaufman research less than 20% of the fastest growing companies in the
Speaker A
that's credit cards. Almost every young company you can think of, to one degree or another, was funded on credit cards, and it is the single largest source of capital for young companies after founder savings. And then the next place
Speaker A
need money on these terms because you know Venture cap apis unlike Banks they don't lend against secured assets they give you money in exchange for shares so they take some of your company away so my answer is if you don't need it
Speaker A
where they tend to get money is from friends and family. After I've tapped out my credit card and I've used up all my savings, I turn to people I know and say, "Hey, will you help me?" And that's the
Speaker A
mechanisms for funding like angelist like these kinds of peer-to-peer funding sources as people increasingly Provide Capital in smaller amounts but more people doing it Direct having said all of that though Venture capitals are hugely important for those young
Speaker A
third biggest source of capital. And then the next place is banks, and the banks are a totally weird situation because with banks, they get a lot of attention, but they actually fund very, very few young companies. But it's not their fault.
Speaker A
you play the race is by getting money from people like Venture capitalists who give you the money so you can you can compete with other people who are racing as fast as you are if you can run a
Speaker A
You have to think about the way bank lending works and how shareholders want banks to lend. They want them to lend money against secured assets, and young companies don't have any security. They have nothing to secure it against, and the
Speaker A
control of your own destiny good with with that introduction um didn't mean I forgot it it was a little negative on Venture Capital so sorry to the panel but but uh let's see what they can do with it I'm going to ask John harth the
Speaker A
joke in the industry is you can get all the bank funding you want as a startup as long as you don't need it. And then the last piece is venture capitalists. They get the lion's share of the attention, which in some ways is
Speaker A
small little Enterprise that you know has helped entrepreneurs over the years so with that John I'll let you take the panel and tell us about financing sources all right thank you very much appreciate it and I would say I think
Speaker A
warranted. You know, your Googles and Apples and FedExes and many others all have venture capital money inside of them. But the reality is, and this is from Kaufman research, less than 20% of the fastest growing companies in the
Speaker A
money it's sort of like approximately in the zone with maybe lone shark or somewhere around there so it's not free but some companies absolutely require it especially if you're building a massive company that you expect to grow really
Speaker A
United States took any venture money. And that's not because the VCs wouldn't give it to them, it's because they didn't want it or didn't need it because they had all those other sources. I don't need money, and I certainly don't
Speaker A
how do you finance your early stage Venture we are mostly early stage like very early stage investors and uh I'll make sure that we open it up for Q&A uh after a little bit around 6:45 I think um so keep me honest if I keep going
Speaker A
need money on these terms because, you know, venture capitalists, unlike banks, they don't lend against secured assets. They give you money in exchange for shares, so they take some of your company away. So my answer is if you don't need it,
Speaker A
stuff so I'm uh John harthorne I'm the founder managing director of a fund called two lanterns Venture Capital we just finished the 25 and a half million seed fund and we are launching our second fund right now which will be a 30
Speaker A
definitely don't get it. There's no question the venture industry has become, stayed the irony is it's intended to fund disruption, and yet it's an industry that had become complacent. And interestingly, over the last five or six years, we've seen the emergence of other
Speaker A
we'll probably increase that up to about $500,000 we invest in software only startups in the US and Israel and otherwise we're industry agnostic we like some Industries better than others because of the Dynamics and the opportunities but it's up to the
Speaker A
mechanisms for funding like AngelList, like these kinds of peer-to-peer funding sources as people increasingly provide capital in smaller amounts but more people doing it direct. Having said all of that though, venture capitalists are hugely important for those young
Speaker A
mentioned prior to the fund I I was the founder and longtime CEO of mass challenge ran it for a decade learned a ton met a lot of amazing people still involved and still love it uh before that I was at ban and Company before
Speaker A
companies that don't have access to bank money but are growth companies. They have the prospect of being a five million or a ten million company in a couple of years, and they need that growth capital to get there quickly. So it's a race, and the way
Speaker A
time used to be the biggest feeder school for all of mit's graduate school programs I don't know if that's changed because more of the I grats are now staying home and starting startups in India but um anyway because of that sort
Speaker A
you play the race is by getting money from people like venture capitalists who give you the money so you can compete with other people who are racing as fast as you are. If you can run a
Speaker A
Venture about 20 years ago and uh I've been doing what would be called Deep Tech today uh in all that time um and about 7 years ago I ventured out to start uh an early stage fund with another colleague in the business who
Speaker A
company off cash flow and some combination of credit card, your own savings, and friends and family, you know, Bob's your uncle. Run, run, you know, keep all the equity because, you know, there's no better thing than being in full
Speaker A
funds are focused on preed and seed and uh we just activated our third fund it's a $50 million fund and we are um you know we go do mostly I'd say uh today everything is labeled AI within that I'd
Speaker A
control of your own destiny. Good with that introduction, um, didn't mean I forgot it. It was a little negative on venture capital, so sorry to the panel, but, but, uh, let's see what they can do with it. I'm going to ask John Harth, the
Speaker A
funds and I look forward to uh a good discussion today hi I'm Josh wman um I run nor Easter Ventures which is a deep Tech early stage fund focused on sustainability I'm here in Cambridge uh we focus on series seed and a we lead or
Speaker A
panel to come up. And John Harthorne assembled the panel. John and I go back quite a ways. He has many accomplishments, the signature one of which is, uh, in my mind, is Mass Challenge. He was founder of Mass Challenge, so, uh, a
Speaker A
deploys $350,000 to 20 or 30 companies I raise a half million dollar to million for each individual deal and behind the scenes the economics are different for me than for him and the challenges I think are different for proper fund than
Speaker A
small little enterprise that, you know, has helped entrepreneurs over the years. So with that, John, I'll let you take the panel and tell us about financing sources. All right, thank you very much, appreciate it. And I would say I think
Speaker A
three companies over 20 years kind of take issue with the video because I didn't raise money from friends or family or my bank account or credit cards um and I wouldn't recommend that I think it's a really bad trade-off for
Speaker A
the video is accurate. If you don't need venture capital and a lot of companies are not designed well, that the company is not actually capable of handling venture capital, then it's not a good fit. Venture capital is expensive
Speaker A
Company perhaps sacrilege I don't have any MIT affiliation but they still let me come um so my name is name is Mary I'm at Liberty Mutual strategic Ventures as a principal I've been there for several years for a corporate Venture
Speaker A
money. It's sort of like approximately in the zone with maybe loan shark or somewhere around there, so it's not free. But some companies absolutely require it, especially if you're building a massive company that you expect to grow really
Speaker A
the dorm room fund rough draft funding things that folks here might be a little bit more familiar with um for a startup in food Tech um but at Liberty Mutual strategic strategic Ventures we were focused primarily on seed to series B
Speaker A
quickly into a billion-plus dollar company. Then there's really not very many other options. So, uh, we have assembled a bunch of venture investors here. It's an awesome panel. I will let everybody introduce themselves. Uh, key topic is sort of financing and
Speaker A
you're tending to write one to five million non-lead checks I'm uh Drew vulpi um I'm founding partner of first star Ventures uh the first half of my career I was a programmer and CTO and co-founder I was either co-founder CTO or early team of
Speaker A
how do you finance your early stage venture. We are mostly early stage, like very early stage investors, and, uh, I'll make sure that we open it up for Q&A, uh, after a little bit around 6:45, I think. Um, so keep me honest if I keep going
Speaker A
to found first star and we're a preed fund that's focused on applications of new kinds of computer science to large problems whether it's things in uh discovering new drugs and new molecules synthetic biology um autonomous Trucking anywhere that computer science is kind
Speaker A
over that. Um, I'll quickly introduce myself and then I'll just pass it down Neil and John and down the row and just give maybe a two-minute intro. Make sure to say your stage, key areas of focus, uh, size of your fund, etc., that type of
Speaker A
turn it into a real company that goes on to raise more Capital beyond that awesome all right so that's a quick overview of who's on the panel you got the context let's just dive right in let's say Lily Lily's my the associated
Speaker A
stuff. So I'm, uh, John Harthorne. I'm the founder, managing director of a fund called Two Lanterns Venture Capital. We just finished the 25 and a half million seed fund, and we are launching our second fund right now, which will be a 30
Speaker A
say Lily and I come up with a great idea we're we're super convinced it's a billion dollar company uh but we're really early we haven't built anything yet it's just a kind of a drawing or a sketch or idea uh should we go for
Speaker A
to $40 million seed fund. So we do seed stage and pre-seed stage investments. In fund one, we made 36 investments. Our average size check for the first check was around $350,000. Then we reserved some for follow-on as well. Uh, in the second fund,
Speaker A
like kind of all of the beginning stuff if you're an entrepreneur how do you try to think that through and I'm going to start with I think Neil NE and Jan and Drew are both similar to me at the very
Speaker A
we'll probably increase that up to about $500,000. We invest in software-only startups in the US and Israel, and otherwise we're industry agnostic. We like some industries better than others because of the dynamics and the opportunities, but it's up to the
Speaker A
is it okay to start that conversation where would you suggest they go yeah yeah I I think of um fundraising as um almost the same as building your business plan hiring recruiting building a company you never stop raising if
Speaker A
entrepreneur to convince us they've got a great idea and a great market and that they've got the right traction. We're open to invest in anything as long as it's software only and geographically in the US or in Israel. Uh, and then as Joe
Speaker A
how to raise money so the sooner you get started on learning the terminology understanding who what type of capital is available nearby around you or not uh the better it is you know ideas are a dime a dozen and it's all about
Speaker A
mentioned, prior to the fund, I was the founder and longtime CEO of Mass Challenge. Ran it for a decade, learned a ton, met a lot of amazing people, still involved and still love it. Uh, before that, I was at Bain and Company. Before
Speaker A
longest time that succeeds so yes it's never too early to start because even if you're not raising money you're learning how to raise money who to eventually go to go go for so it's just one of those skills you have to have to be a
Speaker A
that, got my MBA at Sloan in 2007. Let me pass it along at that. Neil, you? Hi, I'm Nanik. Great pleasure to be here. Um, a very long time ago, I got an undergrad in computer science from IIT, which at my
Speaker A
it off BCS bounce bounce it off a lot of other Founders Bounce It Off people in your network um but I would actually wait to fundraise until you feel like you're really really ready to go do it I
Speaker A
time used to be the biggest feeder school for all of MIT's graduate school programs. I don't know if that's changed because more of the I grads are now staying home and starting startups in India, but, um, anyway, because of that sort
Speaker A
VCS you actually want to take money from so I think there's kind of two stages where first you want to really vet the idea and then when you're ready I think you want to actively go into fundraising mode so have a good funnel investors you
Speaker A
of deep tech and heavy computer science, companies have always been near and dear to my heart. Um, I started my career in tech as a software engineer, ended up ru
Speaker A
gives you a term sheet and you've got kind of a bit of a bidding war um so I think it's good to either be in fundraising mode or not and kind of wait to to turn on the pipe yeah I think
Speaker A
that's awesome advice and I would say so in kind of summarizing it and adding a little bit of a tweak here as well um I think it's always good to be talking to investors primarily to be getting advice
Speaker A
right so I think that's the first approach the best way to the the the uh the best way to approach me is to say I'm not raising money right now I just want your advice I want to hear your
Speaker A
thoughts this is my business plan does it make sense these are my ideas and then part of it is do I need Venture Capital right we've already had this sort of discussion and I would say like I can tell you pretty quickly if we
Speaker A
would think that's a venture backal business or not right and and for us it has to have some line of sight to potentially be a billion dollar uh company uh or else it's really not worth taking the risk of venture capital which
Speaker A
is a super high-risk and pretty expensive type of financing and so if you're just opening a local uh barber shop or restaurant it's not Venture back it's not it does not match the financial requirements of the industry you need to
Speaker A
have something that is potentially very high growth and very high value and so you can have that conversation early and then we can help to also identify other sources of funding that might be right grants loans friends Family Savings
Speaker A
might be right for some people not for all I agree you shouldn't put yourself in massive debt and and become really desperate is is a bad situation but so so I think come early for advice and you and the ecosystem is very friendly and
Speaker A
we'll refer you to other people we'll give you that general advice on how to structure it what else you would need in place and ask those questions what would I need to bring you John for you to give
Speaker A
me funding what would you need to see do I need metrics do I need a prototype built do I need a full Pro product built MVP how many people on the team what types and then you get smart you talk to
Speaker A
five six people you'll get different answers but they'll be similar enough you can deduce what you need to do so I think talking to people early and making friends the other element of that I would add is it's a two-way street like
Speaker A
getting getting investment from a venture fund it's not quite like getting married but it is a pretty close Bond and you want to make sure that you like the venture capitalist so you're also testing them are you the are you hon are
Speaker A
they honest do they give you good advice are they helpful are they jerks are they you know giving you bad advice do they understand your technology do you like working with them and then when you are ready for funding you can go Target Drew
Speaker A
because you know he's the guy that gets the technology he's super friendly friendly I love the rest of his team I want to go to him first for funding and maybe he says no but you have now a line
Speaker A
of other people to go to um so I think it it's valid to talk to people early uh but I agree once you get into fundraising it's a full-time job and you got to be in fundraising mode it's great
Speaker A
advice so um so now uh uh what about kind of where to find uh investors and I'm going to turn to to Josh and Mary and I think just like sort of you know you guys where do you have out where do
Speaker A
you you know what would you suggest for other ideas if Lily and I've got this great idea but we don't know I don't know any investors I'm just a student I'm graduating you know maybe I went to a class like this I met one or two but I
Speaker A
really don't know where where to find where do you find where should they go to find folks how would they find you guys would you take a meeting from a cold email or how how does like how you
Speaker A
so I'll start with Josh and then and then Mary I'd say this unlike um many other businesses this is purely a relationship business so referrals you got use the mic for the sorry referrals Elevate um any cold email or cold
Speaker A
Outreach um like these fellows you know I'm always out um meeting people at different forums and different pitch sessions and accelerators have um meetings very often and you'll see entrepreneurs at a you know a tabletop and you'll go up and meet with them and
Speaker A
find out what they're up to just to be out and about so that's that's a place place you can physically meet me or others like me um but I also get every day you know little volley of unsolicited email um sometimes if it's
Speaker A
from somebody I know it will get my attention others I won't even answer because it's off topic uh and that's also another thing that to really think about as you start doing your research there are um sort of clusters of
Speaker A
investors who pull around certain topics some of us are represented up here by stage by geography by uh domain of investment and a lot of inbounds I will get from you know stuff that's just not in the zone but once you find that zone
Speaker A
you'll find many other uh communities who uh circulate if you're you know in my case sustainability and and climate tech there are ecosystems like Greentown Labs or boost over at um suffk I mean there's there are lots of
Speaker A
entities that are already bringing people together and uh meeting someone who will introduce you to somebody else is a great way to get stepped up and you know I'm sure people up here can attest to this too but I'll spend a lot of time
Speaker A
during my day referring deals to someone that I've looked at I said this guy's decent not for me but maybe good for John or maybe good for Drew and I'll send an email along to say take a look
Speaker A
at this now what they do with it I can't attest to but uh and when I receive those sorts of emails I'll definitely take a look great and Mary yeah I would Echo leveraging your network as much as
Speaker A
possible um and and to the last point you made there around um investors doing the same thing leveraging our Network on a Founder's behalf that happens way more often than you might think it doesn't happen with every deal um but I was I
Speaker A
was chatting with someone two hours ago who I referred a deal to that she just LED so this does happen that is certainly an effective way to know where to spend your time who to spend your time with ask an investor at the end of
Speaker A
the meeting if they say it's not for you or it's not for them say you know is there anyone that comes to mind that you think I should be chatting with and even if they don't have anyone off the top of
Speaker A
their head if that was you know a meaningful enough conversation on their end they'll percolate on that and someone might come to mind later so it's certainly worth kind of leveraging your network in that regard uh I also think
Speaker A
LinkedIn is a pretty obvious but good place to start looking around for people that might have the right titles or the right expertise I've gotten tons of inbound that is hey we have a mutual connection but my friend so my friend
Speaker A
reached out to me and asked if I could intro to you that that happens pretty frequently as well again you know if it's unsolicited it might not be in the right you know sector that we're focused on right now but that's totally fine
Speaker A
it's easy also for us to pass on an introduction um I would say the one there's two things that I would caution against um one would be if you've chatted with an investor at a certain fund and they
Speaker A
passed on the opportunity um something I've seen happening more and more frequently is folks going to another investor at the same fund and trying to get them to look at the deal um we do talk to each other so it doesn't tend to
Speaker A
work and then of course you know you what you don't want to do per Josh's point is is have the relationship business not work in your favor right in that regard so that's one thing number two when it comes to finding investors
Speaker A
to chat with I would also be very weary of resources that say you know for $10,000 I'll make a bunch of introductions for you um those do not tend to work the way that you want them to uh that is you know does seem like a
Speaker A
way to pay your way out of something but the ROI doesn't tend to be there so maintain your Equity maintain your money try to hit the ground running again to nonous point this is a longterm thing that you're going to need to know how to
Speaker A
do and in some ways there are shortcuts and in many ways there aren't so taking the time to do it right is going to be your best route to finding the right Partners especially at the earliest stages of your company where the right
Speaker A
Partners can really make the difference in whether or not you can get to the next stage totally agree great advice I think in in general again kind of summing that up warm introductions are the way to go right they I it is not
Speaker A
impossible to get attention through a cold email or cold Outreach but it is very unlikely is not worth the effort and it is often super frustrating honestly I get five or 10 cold emails a day and I mostly just say ban like block
Speaker A
this email address forever and then move to junk folder like I won't even read it if I can tell that it's just a form email being blasted out to hundreds of people generally they're not applicable it's like Hardware in Canada and I'm
Speaker A
like we say on the website software only us and Israel like you're not even close and it gets frustrating to have this constant onslaught of these unsolicited emails so so you're not doing yourself a favor that way even though it seems
Speaker A
easier it just doesn't work so find somebody that you know in common do enough research to Target the right investor find somebody that knows them and get that warm introduction I take almost every warm introduction that I get um especially from folks like this
Speaker A
on the panel you can it's not that hard to find somebody that we know in common that I will respect right and that you're friends with so that's really the way to go um absolutely all right so then let's talk a little bit about uh
Speaker A
the process so let's say they you know Lily and I have found we met some investors they weren't the right fit but we got a warm intro now we're talking to the right people what does the process look like here do I that first meeting
Speaker A
with a relevant investor should I expect on pitching do I send materials in advance do are I should I be prepared with a full financial model it's a really early sort of precede stuff so maybe Drew I'll start with you and then
Speaker A
we can sort of others can chime in uh but how do you expect that process to go that kind of first meeting and does it vary or how standard is it as I mentioned earlier I think in the early
Speaker A
days of a startup you shouldn't rush into fundraising and it really should be about having a bunch of conversation so I would uh I think in most cases you want to be meeting with a few investors and just having a discussion about what
Speaker A
you're working on what you're thinking about getting good feedback on you know what things need to be fleshed out more what data you need what research you need to do and then two you know ask the investor what does she think you need to
Speaker A
see before you're ready to pitch um and it's I think great to get that feedback because I think everyone up here will tell you what we look for and what we kind of expect when entrepreneurs come in the door and in many cases it's I
Speaker A
think a lot less than you might guess um you know many of the best companies in the world had just terribly awful pitch dechs when they pitched and I think you know and that's an example of I think
Speaker A
Founders tend to spend too much time on the deck I think the deck matters a lot less than the idea how much research you've done it how much conviction the team has uh than the actual PDF you send
Speaker A
over um so I think in those early days you want to be just talking to about MERS and I don't think there's any kind of bar to have met I think if you've got an idea you're working on something
Speaker A
that's a great time to hit up folks like like us great Nan you want yeah I think it's along what Drew said now I I will say though that the world has become extremely noisy right it's become noisy
Speaker A
as there's a lot more startups today than there were a year ago than there were five years ago 10 years ago and there's also a lot more sources of capital in the same way so so the sort of the competition for
Speaker A
attention uh is is fierce on both sides as a result you may be very lucky if you if you find an investor like drew that is spending time with you giving you feedback iterating that's excellent that's a really true early stage
Speaker A
investor that's spending time helping you finess they may or may not invest but you're getting some value out of that but then there is uh a whole other universe of capital even at the early stages which is very transactional by
Speaker A
necessity because it's just too many companies too many they have to deploy Capital fast so it's become a very add kind of more of it's already an add business and it's become more of an add business so investors have become
Speaker A
transactional meaning what that you're getting that one shot and you're getting that one shot with let's say a preed firm they do preed they write 250k checks you want to so you want to be prepared uh you may not have the luxury
Speaker A
of meeting a Drew in a coffeee shop and having that erative discussion so if you land with that kind of an investor I would say that and let's say I'm that investor then you know the pitch Teck is
Speaker A
just a way to have a conversation most of what those investors are really looking for do you have a very very good grasp of what is it that you're doing like what is the idea what's your Market what are your immediate next 12 month 24
Speaker A
month things that you have to do who you have to hire so that nitty-gritty understand understanding of what is it that you're building and why you're building it if you have that then the pitch Teck is just almost doesn't matter
Speaker A
you should be able to have a conversation and have a very convincing conversation in 30 minutes 40 minutes and guess what if I meet that kind of a Founder you've you had me at hello okay so we a lot of investors have become
Speaker A
that transactional you know you are trying to get that you want to be that I'm going to have you at hello because I really know what I'm building so that requires preparation and that could be you know two years of preparation while
Speaker A
you're at another day job that could be six months with a co-founder but that's it's very situational yeah so I agree with all of that and I think one of the things that you see here is that it
Speaker A
varies a lot too right every fund is different every investor is different um we have slightly different expectations um if you if you find a an investor that is willing to give you that advice and the time and spend it with you and build
Speaker A
that relationship that is super super valuable I also find sometimes I like I I love startups and I love listening to pictures I'm busy I can't do it all day with an irrelevant startup but I do enjoy it and in many cases I think I can
Speaker A
add a lot of value to a startup that is clearly not in scope for us because I'm not this it's no longer a transaction we know that I'm not going to invest there's no way this is not a viable
Speaker A
investment for me so let me tell you what you're doing wrong in your picture what I think is off which I'm hearing wrong you didn't mention this you didn't mention that it doesn't look like you have the team in place and that's the
Speaker A
most important element so I can give you like really honest feedback without a sense that like we're also trying to conduct a transaction together so sometimes you you don't have to be Target explicitly targeted just know who you're talking to and what you're asking
Speaker A
for and what you're trying to get out of that conversation um and I also agree that like pitch decks don't raise money that's not it it's it's you will have to have a pitch deck it's an expectation but really you raise money on totally on
Speaker A
on a different set of criteria and a lot of it is about the confidence that the that you that you gain from the investor and the confidence you have in them so let's let's talk about that a little bit
Speaker A
what are the core criteria that you guys look for each and we'll go just straight down the line here for everybody what is like the most important element to you and I'm thinking really at the earlier stages here uh so like I there's a bunch
Speaker A
of them for us but I'll throw out one that is really important to us and then then let you guys add in on that is integrity is super important as an early stage investor there's five maybe six rounds more of funding to come after us
Speaker A
and you will and and Founders will have the opportunity potentially depending on the market conditions other investors will come and offer them sweetheart deals to screw over prior investors or to like mess up the cap table or they
Speaker A
could waste a ton of money or they could lie to us about stuff there's just too much time and it's a lot of money and risk at stake for us as a fund I need to know I can trust that founder and that
Speaker A
means telling me when stuff's not working that means not covering up problems it's okay every business is riddled with problems it's like that's the whole nature of the the space so I need somebody that can be honest and
Speaker A
transparent also that's committed to fixing problems and isn't you know totally overwhelmed by them but but it's okay if there are problems in there I just want that honesty and integrity is very is one of the very important
Speaker A
elements for us not the only one but that's that's something that's key for us and I don't know if you guys want to add other it's a mine is a very long list because we are first and foremost a
Speaker A
Founder first I mean if my 20 years of investing has tght me anything it's it's all about the founder it it really doesn't matter what the market is it's all about the founder now but the best Founders in the wrong Market will have a
Speaker A
hard time Market does matter when behind you matters so we do as a firm we do our work on the market so we are bullish on certain markets and bearish on certain markets if we bearish on the market we
Speaker A
will not waste our time meaning a Founder we just we we respect their time we'll just tell them look it's not for us and but if we are if you are oriented in a market then for us it's all about
Speaker A
at that early stage there's barely a product even if it's a product it's going to change and it's going to probably get thrown out of the window and won't have MVP and something else will be built so we
Speaker A
rarely hang a lot on the specifics of the product or get excited by the product we get excited by the founder so what is it that we looking for in a Founder look you have to re this is an
Speaker A
extremely hard job and if there are found you know aspiring Founders in this room I'll just tell you that this is not for everyone you can get a very good living working for a Google or a Facebook and you know see your kids at
Speaker A
for dinner at 8:00 P.M this job is very hard you may be successful you may not be successful so this is really for a certain type of an athlete that just has that an intense drive very fast learner
Speaker A
excellent Communicator excellent Communicator why because you have to communicate with your investors you have to you know convince your best buddy at Google who's earning half of million dollar to quit that job and come work for you so
Speaker A
excellent Charming Communicator great personality and knows how to surround themselves with very strong people you know this founding job is okay the founder has the vision but it's not one person who builds the company it's a team that builds a company so my list is
Speaker A
very long but those are just a few top of uh top of the list those are some of the qualities that we look for and as I said if those qualities exist these folks have done their work they're tense
Speaker A
they really studied the problem and they can convince me in 15 minutes I make very quick decisions on investments I most of my investments that I've succeeded I've decided in the first 10 minutes so which is very different from
Speaker A
Drew's approach I know but uh that's why it's a vast universe and there are different types of investors I would agree with that um I think the founder Charisma is really important they're GNA be communicating to everybody up and down the the value
Speaker A
chain into the employees and up to the board and up to other investors and customers if they can't communicate succinctly convince them why their product or service or company is going to be successful then that's sort of a
Speaker A
no fly zone grit is really important as you were saying John and just can you get any evidence the person has pushed through really hard challenges over time I tend to invest in PhD Founders who were firsttime CEOs uh coming out of PhD
Speaker A
program commercializing Tech that they licensed from their University and sometimes you get folks who are really technically competent and can't communicate as sometimes as you get folks um who have a lot of ambition but no Market Sav so I think you know having someone who
Speaker A
understands the pitfalls and risks of their technology uh and can understand how it situates itself competitively in the market as that market evolves because day one it's is very different than it will be several years later is really important too I wouldn't rank it
Speaker A
as high as some of these others we've talked about but I think it's very important uh for that person to be able to see around the corner if you will and understand how their Tech could be superior and give them leverage uh with
Speaker A
their products that are going to be built on top of that Tech um what else can I say I think I'll pass it along I I'd Echo everything that's been said the only two things that I would um
Speaker A
emphasize here would be one pace of learning um so if you're a precede founder you're not going to yet be have all of the skills that are necessary of being a series B of being a series C of
Speaker A
you know being a Founder that takes a company public but I have to believe that you can get there um and and there are some folks that have very strong beliefs about whether know founder Le company should be the ones to take them
Speaker A
you know Founders should be the one to take the company public or if you bring in other people there's there's a lot to that conversation but generally I think the money that's going in at the preed stage has to believe that you can get to
Speaker A
seed to A to B and Beyond um so that would certainly be one piece I also think there's a a kind of creativity that's necessary in problem solving and thinking about selling to different types of customers and that often is
Speaker A
paired really well with a self- awareness uh know what you are good at and what you are not good at your first few hires are going to make a massive difference in the success of the company knowing what you need to bring in what
Speaker A
you can you know hold off on what you're able to be competent at you know but also what you don't uh want to be competent at long term or have the capacity to be competent at long term to
Speaker A
ninous point it's teams that you know go far not an individual person uh so I think there's a lot to that as well and and that self-awareness comes through pretty quickly often when you're chatting with Founders and I think for
Speaker A
the founders that um don't have that or don't want to communicate it it can also come through pretty quickly that this person might not be able to lead a team and bring on the right people at the right time to leverage what they need to
Speaker A
to win the market and accordingly we we think a lot about that as well at the earliest stages and even though I sit you know at seed to be so a little bit later than many of the folks here it's
Speaker A
certainly still something that's often discussed I think that's a great list we look for I think everything that was said here fast Learners uh people who are self-aware if I had to boil it down to one thing we really look for people who
Speaker A
have big bold ideas and crazy ideas but can make them inevitable so is someone a force of nature enough where they can take a crazy idea and make the world bend around that idea whether it's hiring people whether it's raising money
Speaker A
whether it's convincing the press to write about them whether it's convincing that first customer and then that Third customer and then you know getting that 50th engineer to join them but being able to warp people around your idea
Speaker A
just having having that that energy is is I would say how I distill that big list down yep so a great a great discussion I think I agree wholeheartedly one of the key things that I think we heard here consistently
Speaker A
we had some slight variations on the theme but everybody talked about the team right the founders this is at the early stage for us I would say precede it's like 70% about the team 20% about the market and then only 10% about the
Speaker A
product traction whatever that is we like to see something because it demonstrates an uh a a focus on results so I'd like to see that you've accomplished something but we know that that there's going to be seven pivots
Speaker A
before you get anywhere that really looks like a a proper product so I care a little bit less about how far you've gotten with the product and more just that like you've been able to sell it to somebody you've you've made some forward
Speaker A
traction that's results oriented and then the market I just look for can it support a multi-billion dollar it is it hyper competitive are the Dynamics reasonable and in your favor um that's obviously a plus but really it comes
Speaker A
down to the team and a lot of what this comes down to we heard this sort of Charisma and this you know ability to kind of bend the universe around your desires and um is like a sales capability right can you sell because I
Speaker A
think I think was Janna made the point that you know you have to sell to your team to convince them to join you for a fifth of their salary for a company that has no brand name that's recognizable
Speaker A
has no equity of any real value yet that hasn't really raised money hasn't really sold anything it's brutal right and then you got to sell that to your family why you should quit your job and take no salary probably for six months or 12
Speaker A
months take this massive risk where you're most likely going to lose money and not succeed like it's you have to convince so you have to be very convinced and you have to have this glow about you that convinces everybody in
Speaker A
your vicinity that your impossible idea is actually going to happen not only is it possible but it is inevitable I thought that was a good way to put it yeah can I I'm just gonna add something to that so you all heard the word team
Speaker A
and founder like because at the early stages that's really what's being bet on but I can bet you that if you beated a blind taste here amongst the five of us on the same person or let's say I set of
Speaker A
five people five Founders would' get different answers so inherently what that says and I'm I'm sure this is a room full of Engineers here it is this early stage Venture is inherently an inefficient process okay beauty is in
Speaker A
the eye of the Beholder what I may consider charismatic Drew may say I don't know what she's seeing in that guys okay so that's why it is very important to talk at this early stages to a broad range of people you know just
Speaker A
because you get turned down by three doesn't mean you don't have what it takes you know beauty is in the eye of the beholder there has to be a fit different firms have this is also how our investors are betting on I mean we
Speaker A
may have the same LP so say you know I'm going to put money in drw fund because he does early stage investing a little bit differently than Nanna does that converge why because it is that this game this early stage game this is not
Speaker A
an efficient stage of investing and that's what we are all exploiting we all have our views of what is a good founder what's a good market and you are sort of our customer in a way right we are
Speaker A
selling that product to you and you're selling your product to us so it's inefficient and it's very important therefore to just have a broad range of cont ations um and ultimately if you believe in your business you'll raise money yeah
Speaker A
I would add just one more thing if I could which is that um while we I would like you to be a highly uh have high to have high conviction about your deal and the market and how you will situate your
Speaker A
product and the team and all that stuff and you really feel strongly about the inevitability of it I would also like to see um that you're coachable meaning that you will are open to feedback from your board and from your uh market and
Speaker A
you will accommodate that there lots of people who are so bullheaded that they will not take that feedback and doesn't mean that I as an investor am right but there has to be some Rapport in that relationship it's a durable relationship
Speaker A
John lik it to marriage it's not exactly like that at least not my marriage but it's a it's a long-term commitment uh and uh that Rapport really has to be there because there's a things get tough and you need to have that partnership be
Speaker A
pliable around tough issues and if that person who's leading the company is so bullheaded that you can't get that through that's a signal for walk away from from my perspective yep agreed and so I think again you heard it here a lot
Speaker A
of it's important it's a bit of a numbers game and making sure that you have Rapport in both directions so don't get too dejected if you if a if a venture fund passes on you we pass on virtually all of the deals we see and
Speaker A
many of them still go on to become hugely successful besser has listed on their website their anti- portfolio which is worth much more money than the startups that they did invest in right so they passed on Apple at like a $50
Speaker A
million valuation I think among others and HP they passed on and others which are bigger than the rest of their portfolio even though it's a hugely successful great firm so uh so don't take it personally a lot of it is about
Speaker A
fit and we're wrong all the time it's a lot of guess work 60% of venture-backed startups return zero dollar so it just it's a it's not a science per se it's a lot of guess work and it's about fit and
Speaker A
you just got to find the right people for you too let's open it up for questions and uh I will as incentive uh hopefully people have got questions first people ask questions we're going to give you guys some merch we got
Speaker A
shirts and hats you don't have to take it but you can if you want to um so why don't we start right up here these two we'll go start right here in the front row and then and then you'll be next
Speaker A
sure so my question is for preed do you expect all co- funders to be full-time on this or just like the main funer quitting their job focusing on this and having two people just like unofficially working on the company is good enough
Speaker A
you think this this is a team this is a commitment yeah I don't know you want to startone Jenna we we see a lot of that you know it's hard to it's hard to get four or five people
Speaker A
off payroll and and work for free um I'd say the answer is it depends this is where folks that are technical have a huge Advantage because they can do a lot on their spare time they can you know
Speaker A
they know how to find the coder and whatever uh and so I yes it's perfectly okay but the principal Founders uh you know you want to see that they're committed that they put some skin of the game here that this is
Speaker A
not you know let's go try to start a company and be a Founder that you're really serious um so we do like to see that uh you know Founders are taking that Financial pain that they're not going to
Speaker A
raise money and pay themselves Rich salaries that the money is going to go to really hire the engineers Etc and it's okay if you have those people working parttime and they're going to come fulltime once you raise the money
Speaker A
Drew you agree with that yeah I would I think if you're pitching for a preed it's okay to still have a job but certainly after you raise that funding you should be dedicated to the startup and it also question if someone just at
Speaker A
least one person on the compan at least one but I'd also question if someone's part-time after you've raised the preed round are they really a Founder like how committed are they maybe they're just an employee or an advisor but you know the
Speaker A
folks who are really committed and really view this as something that's going to happen those people typically will want to quit their jobs and focus on it 100% I agree I think that I think those the truth is in there and you
Speaker A
could also out you know contract parts of the business it depends on how core that role is to the success of the business but we would certainly want to see at least one and probably two or three founders fully committed and then
Speaker A
you could have adjacent roles if you're early and still Building Technology it could be even like the Prototype Etc that are maybe part-time or even outsourc but I we need to have a point person who's doing nothing but that business
Speaker A
all day is important for us I would say all right I think you had a question here great penel thank you um and this comes back to what you mentioned John at the beginning and what you just mentioned Josh um how do you build a
Speaker A
company to be able to take on the capital you mentioned that briefly at the beginning and does that go along with Josh what you were uh talking about with regards to being coachable and maybe the the board uh positions that
Speaker A
you open up too I'm not sure I get the question so can you the so at the beginning you said but not every company can take on venture capital is built to be able to take on Capital so what makes a company
Speaker A
yeah I can start yeah so I think I think there's there's a couple of layers to that one is that it that the financial growth that is being projected or that is believed to be viable has to be well
Speaker A
suited for venture and typically that means you you know the ideal kind of startup growth pattern from a venture capitalist perspective is that you have a pretty you know you might be starting off preed with no money yet but we
Speaker A
believe that there's a viable product that somebody's going to buy and that you can get to roughly a million a million point1 or2 million dollar something like 1.1 1.2 million doar on like this initial group of customers that are willing to take risk on a new
Speaker A
product it's not quite perfect yet and then you want to see sort of triple triple double double double right that that Revenue triples in the next year and then it triples again and then it doubles again doubles again doubles
Speaker A
again and that gets you to like a 100 million of Revenue pretty quickly and that's a billion dollar company and like for Venture funds there are a lot of variables that are on our mind that are really important to us we have basically
Speaker A
a 10-year cycle to invest and extract capital from the startups uh and we invest over a period of three to five years typically so call it three years that means we need to see that you can get to a billion dollar valuation and an
Speaker A
exit in seven years right if you can't do it that quickly it just doesn't fit our model my LPS need me to get their money back and yeah you can go a little bit longer than 10 years on average they
Speaker A
typically go like more like 14 but we're still tell our narrative to our investors is I'm going to get you you know five extra money back in 10 years so if you're telling me it's going to take you 25 years to return money it
Speaker A
doesn't it just doesn't fit so a lot of it is that Financial path and then some of it is the rest of the team elements do I believe that you're credible do I believe you're committed do I believe
Speaker A
you have the capabilities uh right all of that stuff I think I don't know yeah and your plan of why you came to us for Capital has to match who you're going to hire so you can execute in that plan if that's a
Speaker A
sort of a credibility building step that you understand and can communicate to us that with the resources the problem we're solving for you enables you to reach that inflection point meaning that that increase in value of the equity we
Speaker A
put it in a dollar and we're going to get it to at least on paper $3 in 18 months then you'll be open to raising more money from other people are follow on Capital from us and that's really how
Speaker A
you um create the create the story to answer your question yeah that's a great point and I think Desh despond used to always tell me running a startup is like driving through a desert and uh so you have some end point you got to get to on
Speaker A
the other side but all you really care about is the next gas station right because if you run out of gas in the desert you're dead and if you have to pull the doors off the car to make it to
Speaker A
that gas station you'll do whatever you got to do to get there and so a lot of what investors also care about is as a as a seed investor one of my questions is are you going to be able to raise series a like are these
Speaker A
metrics that you're promising me in the next year before you run out of money again or 18 months before you're going to run out of capital is that enough for the next investor in line to get excited and want to invest in you or not and so
Speaker A
that's also a good question for the investors and something that you need to get comfortable with is what kind of metrics do you need to produce with the money that we're giving you and we are pretty clear on that I think they should
Speaker A
be able to tell you pretty straightforward and then you need to be able to present that kind of financial model yeah I think one thing that hasn't been really stated here in the panel is each of us have investors behind us so
Speaker A
they have an expectation of what sort of capital they putting in and what they're going to get back and a risk profile and a tolerance for risk both in terms of time and domain and while we may look
Speaker A
like we're at the top of the Heap in terms of you know doing out Capital we have to go and answer to the people who are putting confidence in us and each of those have different business models it
Speaker A
could be a 10year fund or 12E fund it could be a Perpetual fund it could be a a family office that has Capital that they just continue to spend and they don't really care as much about returns or it could be an endowment or a
Speaker A
strategic fund from a corporate which will have different demands and requirements right I think it's important when you approach a VC to understand what their agenda is because that'll help you calibrate uh what you're asking for and their ability to
Speaker A
deliver great uh up here how else are you supplementing the deal flow in addition to the inbound leads and introductions because obviously this is the only way how you meet Founders that's probably very limited market say again sorry how are
Speaker A
we how also you supplementing the deal flow oh how are we supplementing the deal flow all right good question I guess where do you guys go to find your deals one of the places that I go is other investors so I I'm regularly in
Speaker A
conversation with other investors that have overlapping Focus areas stages folks that I trust and believe might you know introduce me to interesting companies um but I would also say at least for us it's probably 50% inbound 50% outbound um we're also looking to
Speaker A
find companies that are interesting to us and the outbound might be because we hear about a company and and don't have an induction on our side um but we're often reaching out to companies to chat with them and you know at least on the
Speaker A
the benefit of a corporate is they tend to know the company that sits behind me that's not the case for everyone and so there's you know a companies generally have Venture funds generally have a mix of inbound versus outbound um but for us
Speaker A
we we certainly still do a fair amount of outbound to companies that are interesting and I think that's where uh it becomes incredibly important to have a website that effectively communicates your vision uh so that I can learn as
Speaker A
much as possible and and get excited about something that I might have come across either via you know someone in procurement sending me something something that you know one of our 45,000 employees has seen that's interesting something that another
Speaker A
investor has seen but hasn't talked to theany so can't make an introduction um it all goes back to communicating the vision in a way that makes it easy for folks to find you and get excited about you and then also communicate with you
Speaker A
if if it makes sense Drew how about you you got you have a secret source of startups or how how do you how do you go about sourcing um you know for us we're super early stage so companies usually
Speaker A
don't exist or don't much have much of a presence when we invest so it tends to be a lot of networking and just being known as an investor that does a certain thing so we get a lot of deal flow from
Speaker A
our existing Founders from people we've worked with from people in the community and we spend a lot of time just fostering relationships making people know what we're up to and what we're doing um you we get some inbound you
Speaker A
know like you're mentioning John we get I don't know I probably get 10 or 20 Cold emails a day that's not the best source I will say though things like LinkedIn and Twitter I think are very good I get a lot of Twitter DMS from
Speaker A
people doing interesting things and if someone's doing interesting things that's of to first star like I will always take uh you know a zoom or a coffee with them so I think things like that are are are important to us you
Speaker A
know I think over time too we've cared less about increasing our funnel increasing the amount of deals we see I think one of the secrets about Venture is we all are inundated with just way too many pitches and a lot of what we
Speaker A
want is just finding you know if we could have a source of like five or 10 really exciting folks every week that would be perfect and we want no more than that probably even less than that if we could have really five high
Speaker A
quality fantastic things that were exactly what we do every month that would probably be enough so a lot of what we've tried to do is set up ecosystems and set up networks so that like people are sending us high quality
Speaker A
things that are in Target for what we do and and are really high quality people yep I agree with that I think it's definitely not about quantity like on our side of the table we are fighting quantity I get I'm overwhelmed with deal
Speaker A
flow so it's not that I want more deals it's just that I want quality deals and that's the trick is where do you find the quality and a lot of that comes from other investors warm intros and you
Speaker A
start to be able to differentiate this person consistently sends me great deals this person sends me whoever they met at the grocery store like it just it doesn't seem to make any sense so you so you start to sort of be able to validate
Speaker A
you know that the worth of that intro uh so and then we go to events we speak at things like this we come to campuses we run our own events we just try to you know meet as many people as we can and
Speaker A
and find them all right what else maybe we'll go a little bit further back and against the wall sorry to make you run with the microphone all the way out there all good thank you so much for your time um
Speaker A
how are firms rationalizing higher valuations that we're seeing we have seen in the last two years particularly for pre-revenue businesses um going into the 10 20 million 30 million preed valuations is the status qu change in my my sense has
Speaker A
always been at least for my own company I'd like to be uh poster Revenue before I raised my first round of institutional capital and then my second question um is in line with a previously asked question which is um is it okay for an
Speaker A
MBA student to raise while they're still studying and they've demonstrated strong Traction in the business well if you if you can reach Revenue before raising your first round that's music to our ears um that's Bravo I mean that's the way to go um it really
Speaker A
doesn't matter whether you're in school I mean we know undergrads who got I mean there's a very hot uh company that's uh literally a jorg down undergrad he got it going it's in the HR Tech space hiring people to do sort of data
Speaker A
labeling let's call it that it's it's bar the company is barely two years old it's reach I don't know some gigantic valuation in two years but that's on the back of real Revenue and the revenues came you know it was a
Speaker A
student getting the business going and and having very high growth ultimately will it be a big successful business we'll see um so there are all kinds of models and uh you know it's it's all about business fundamentals if you
Speaker A
understand what business You're Building you know exactly what to do and you can get going without Capital that is the best place to be in I'll chime in on the valuation question it hasn't been my so I I feel
Speaker A
like in the last year year and a half two years valuations have been flatter down and actually been significantly better from an investor standpoint it's been much more investor friendly environment it was 2021 2022 things became insane and like liter it's what
Speaker A
happened essentially was that these non-traditional investors hedge funds and other large holding companies firms like tiger Global and SoftBank who have individually have funds that are 100 plus billion dollars entered the Venture Market which itself is only about $120
Speaker A
billion market like it's kind of a niche financial sector and they more than doubled the amount of money being spent and that just led to frenzy and the doubling of valuations especially at later stages seed stage I think we saw
Speaker A
it go up like 25 30% it wasn't that it was impacted what we mostly saw as a problem at least for us we saw that you had to make decisions very quickly so you would meet a startup and they would
Speaker A
say hey we're closing the round you know it's Tuesday we're closing the round on Friday I need your responses by Wednesday night to know you're in the round we're already over subscribed do you want in or not we'd be like is there
Speaker A
a is there a data room can we do interviews no this is it there's the pitch deck and my handshake tell me if you want in you're like it's not really possible to make decisions like this it's crazy so it was a frenzy and that
Speaker A
leads to high valuations and poor decisionmaking by investors because there's just too much happening and you don't want to get totally left out and do nothing for a whole year and a half but you also don't want to do a lot of
Speaker A
those deals so you have to be very thoughtful now it has gotten to be much more investor friendly and we can take three months to make a decision about a deal we try not to we try to be we're
Speaker A
pretty quick at making decisions but you have the opportunity to and you can do lots of customer research and interview the whole team Etc and the valuations are much more reasonable I would also so so that's been I think good maybe in
Speaker A
Silicon Valley and for certain parts of AI it's it's still inflated because there's a sense that it will take over the world and so no price is too high so there's still Pockets like that um but for the most part I think they're more
Speaker A
reasonable I would say this as a piece of advice to a Founder maybe moderately self-serving as an investor but I really do think it's true that it don't chase the high valuation it actually like more often than not will come back to haunt
Speaker A
you because you you there are a series of expectations for each subsequent round and in essence you're in general you should assume that you're going to you're expected to roughly double that valuation at the next round and then
Speaker A
double it again at the next round and so on throughout the pipeline it's not exact but somewhere in that vicinity and so if you get a very high valuation on your early round that may be divorced from your revenue and your other metrics
Speaker A
because it's still an idea but at the next round guess what they're expecting you to have a revenue that matches the valuation you're targeting and if you go flat or down it looks like a dog every like a lot of people see that as a very
Speaker A
bad signal and you will find it hard to raise money and you can find you can sort of shoot yourself in the foot by targeting by chasing too high valuation early on it really happens very often and I think look there are standards
Speaker A
that are standards for a reason and you should roughly fall within that range of normal uh at each round is just going to make your life easier that's my thought I don't know if others disagree or agree yeah i' agree with that a lot and I
Speaker A
think some of the reason those valuations have gotten high is a lot of huge firms have gotten into the very early stage so a billion dollar fund will start writing some preed checks they don't care about valuation because
Speaker A
most of those checks are just about optionality on the next round the trouble for the startup is if they're not excited about the progress you make and don't want to lead your a there's a huge signaling risk where no other
Speaker A
investor wants to touch it if they don't want to lead that round and I've seen this happen a number of times a big you know great top tier firm will write a 500K check into a preed round when we go
Speaker A
to raise the series a the only question you get is well why aren't they leading like why aren't what do they know that like I don't know um and I think that really hamstrings you as a Founder because it means that you know it's
Speaker A
either go or noo based on that person's decision also I would end this again slightly self- serving we're all seed stage funds mostly but uh but I also think that the advantage of working with a smaller fund focused on seed is you
Speaker A
get a lot more attention right those large funds going to write you a 500K check that is insignificant to them and they will not necessarily answer your call or care they're just going to say come back when you're raising the series
Speaker A
a let's look at your metrics then but they're not making phone calls to help you with customers they're not helping you hire people they're not giving you the Strategic advice so it is important to sort of understand the Dynamics of
Speaker A
the round and how impacts your next round and your next s 12 months and as a multi-stage investor we do see to be we see this constantly this folks that raised at evaluation that felt really good they didn't get too diluted they
Speaker A
put themselves in a situation where now we're looking at their a or their B and the valuation just doesn't make any sense and they're very hesitant to take a Down Round And it creates a lot of challenges for their partners for their
Speaker A
employees for for all involved in getting the capital to make sense and often times the most painful part of of that is it's not a bad business the business is is doing well the business is doing well a pace that makes sense
Speaker A
for the market that they're in but the valuation doesn't make sense and that is the worst possible position to be in because everything is is going up into the right as it should but the numbers can't make sense at the a or the B based
Speaker A
on valuation of the previous round so uh it is a very very real thing that we see very frequently we will as a valuation sensitive fund frequent ly turn down deals that we would otherwise do because the valuation doesn't make sense and
Speaker A
that's also as a corporate fund that has less sensitivity overall than than many other institutional funds yeah that's an interesting Dynamic to highlight here is a corporate funds are a little bit less sensitive to the financials because you
Speaker A
also have strategic value that you're seeking right yeah yeah I mean everyone else here other than me on this panel has one way to make money and that's if the startup does really well okay we have multiple ways to make money we can
Speaker A
make money if the startup does really well we can make money off of uh some sort of financial Arrangement wherein perhaps we distribute you know the product or perhaps we support the product or we do something else where we
Speaker A
can uh increase our own revenues through a relationship with a startup we're not a public company but if we were a public company with an Associated Venture Capital fund then we might also through association with the Venture uh see a
Speaker A
boost in our stock price if people get really excited about that relationship another way that we make money when the startup itself hasn't made money so there's a lot more more to a corporate fund than to the institutional funds
Speaker A
with regard to how we make money and it's an important distinction as well all right couple more questions we go to 720 is that correct so like 10 11 minutes left maybe two more uh sure sorry I forgot I'm supposed to pick here
Speaker A
with a sort of plat shirt I thought Lily was on our way to just choose some yeah thank you all for being here appreciate it I was just curious if you could quantify like what kind of return expectations um you know your funds look
Speaker A
for as a percentage or stake uh just to get an idea of you know obviously it has to be say an index fund or whatever but just what that what that looks like when you're looking at investing in firms
Speaker A
yeah so I'll I'll give a sort of a context around this and I'd love to hear you guys comments on this but so one thing is in Venture uh that is very defining for the industry is that it is very much uh
Speaker A
defined by the power law right so we made 36 investments in our first fund U we would expect three of them to do phenomenally well and essentially make or break the fund maybe another three to five to do pretty
Speaker A
well and be supportive and then almost everybody else to be a long tail of almost nothing so it's not as if you're expecting an average return AC or you know across all of them or median to do really well you're really looking for
Speaker A
individual startups that have the potential for massive outlier success and then you expect that not all of them are going to make it in fact most of of them will not so um typically one startup will return the entire fund
Speaker A
worth of pro as profit two the next two together will return the entire fund again and then everybody else together beyond that will return the fund the third time as kind of a Baseline and then hopefully do better than 3x but
Speaker A
that would require another one to return the fund but those are kind of the categories that I would say we think about it in I don't know if you guys have specific Equity targets or specific maybe your question is what what is it
Speaker A
what are you expecting from me return yeah from from your investment like if we invest in you then what are we so I'd say it's a um it depends on the stage you're raising money at and how much
Speaker A
you're raising and how much of of the company you're giving up but typically any investor at any stage is expecting a pretty high multiple of return from that particular investment in that company so your company so and that's uh whatever
Speaker A
percentage they're buying they are EXP exp in you at the terminal value to hit north of 2030 X okay so depends if I buy 3% of your company at the terminal value I have to justify a math of at least 30X with a
Speaker A
lot more Capital invested in the company over time meaning delution to my ownership whatever I'm buying let's say I buy 5% of your company at and I pay you some price ter I expect that you're going to raise if you're going anywhere
Speaker A
that 5% is going to get probably get diluted down to 2 and a half% okay because you're going to raise more money my capitalist that ownership will get diluted at 2 and a half% now I'm applying at 2030 X
Speaker A
multiple so this is where not every business is for Venture right and that's where this is where all the earlier conversation is that's and that this is the very quick math that's happening in the first 10 minutes okay do I even see
Speaker A
that possibility here okay what's the number one criteria this is a massive Market even if it's a non-existent market okay if I don't know your name if he cracks it can he create a multi-billion dollar market can he
Speaker A
unlock a multi-billion dollar opportunity why is the market size important no company in the history of the world has ever owned more than x% of their market and it's below 10% all right so it has to be a massive
Speaker A
multi-billion dollar market opportunity so that if you're extremely successful as a public company post public you own 10% of that market your turnover value is so high that I can get at least 20x of my 2 and a half% of whatever I paid
Speaker A
you so now you can do all your nmit you can do all that math in your head but that's the very quick math every VC is doing in the first five minutes of the competition you're looking for home runs
Speaker A
yes grand slams even not even home run home runs when you put the check because what John said it's not like we know at the onset of those 36 companies which ones would be the home runs and which
Speaker A
ones will 3x we have to see that potential in all of them they'll have product risk Market risk execution risk team risk so all those risks will take out you know 30 of those companies there'll be six left right but on day
Speaker A
one they all have to have that potential one simple way to look at it is you know I've done my job for my LPS if as a fund we've returned 5x that's our Target we'd like to do more than that but if we've
Speaker A
done 5x we've done our job so if any of our investments return five you've just done like the average of what we need and again it's a power law so you know we'll have a lot of zeros we need to
Speaker A
make up for so you know we're really looking for those big big home runs and it's also why you know we also don't care that much if you know you don't return all that much Capital back if it's a 1ex like you know you know we're
Speaker A
also not going to beat anyone up over it we're we're in the job of writing a lot of checks and knowing that only two or three of them are going to drive most of our returns all right uh next question we
Speaker A
got maybe one more like right here that's one in the corner all right we'll do two more then we'll get to you but start here start here because I already pointed that but then good eye so yeah this is regarding what John
Speaker A
said um you mentioned that with smaller funds the investor gets to spend focus more on the startup versus a big fund I wanted to understand after writing the check um what is what does this interaction typically look like I mean
Speaker A
what does the investor usually do with the startup yeah so I I think this will vary for all of us to be honest but for for us we like I have run I I founded Mass challenge in it for a decade and I
Speaker A
know that it's really hard to run a company that HR CH everything is difficult right and you get a lot of competing advice and so I think for one of our things is we'll say like we try to be relatively L Fair let the founder
Speaker A
do their thing let them be in charge they know their business and their industry better than we do so we try not to come in and say you must do ab or you have to set your price at this we
Speaker A
try not to have any kind of ultimatums and mostly just listen and ask and say what do you need and and I think what we are particularly good at is customer introductions introductions in general but customers and investors in
Speaker A
particular because when I ran Mass challenge for a decade I built a massive network of you know 50,000 people that I met that are mostly High net worth individuals or cxos and corporations and so if you want to talk to somebody at a
Speaker A
that runs a corporate in Boston I can almost certainly get you to them and so I need to understand what is the business need and then I try to be a goer and go get it for them and be
Speaker A
helpful we also will do strategy you know discussions but I think anybody a lot all everybody here could do those strategies I'm not uniquely positioned to do that so I'll be as helpful as desired but try not to get in the way
Speaker A
but other people might be much more Hands-On and uh I think especially at later stages of BC they get a little bit more aggressive around metrics and they want to kind of have more control but early stage tends to be pretty
Speaker A
collaborative I would say I don't know if you guys see yourselves that way or I mean we we know the line between you know who's the player on the field and and so the player on the field builds
Speaker A
the company right so we we know our job is not to build a company in fact if we are giving advice on how to build a company then there's a big problem that's how we see it so the building of
Speaker A
the company should be now can be help on the periphery because we have you know years of pattern recognition we can see problems coming sometimes before the team can uh we can certainly help with uh many things that the founder may not
Speaker A
have done with we have seen many many companies being built so we know what things to look for what to avoid and we can give our opinion on for example hiring matters we'll give our opinion I'll give my opinion but it's really up
Speaker A
to the founder to take it or not the place where Venture investors can be extremely helpful should be extremely helpful is Downstream capital and that is one that they should be your first place to go is okay I'm planning to
Speaker A
raise my next and so who can you introduce me to is it a warm introduction Etc so I I'd say sort of an experienced investor who has done this many many times is very essential to have somewhere on your cap table why
Speaker A
because they've seen this company building process many times and they uh they can give you good advice but ultimately it's up to the founder to take that advice or not and how they act on it and therefore now bringing this
Speaker A
back to one of the qualities that I think you mentioned coachable is um we I look for in a in a Founder who's never done it before this is their first time they just graduated from school is are they able to to Really distill a
Speaker A
lot of advice because the problem in our industry has become there too much advice okay like all the investors are advising you all everybody's advising so a sign of a good founder is can they distill all of it and then go with what
Speaker A
feels right you know and what is the right decision so that's another quality that we look for all right let's go to our last question before the break it's actually fairly related heard ofit of vure capital my all of all of us
Speaker A
are so could you speak to the ancillary resour benefits of provice intruction that's all that's all the easy stuff what you're doing is the hard stuff that's the hard stuff to build and you know all the product that's succeeding
Speaker A
so any good ventor firm will be able to help cover all of that and because we see so many startups like we know you should pick from one of these five law firms you should have an outsourced CFO
Speaker A
who will look like this at this stage you should move to this kind of a payroll thing so those are they're not hard things I think anyone here could give you a Playbook for how to do that but it's certainly part of what having a
Speaker A
venture investor involved is um you know I think the more helpful things are probably about building the team getting those first customers and then raising follow- on financing those are things that we've seen a lot are non-trivial and non-intuitive if you've never
Speaker A
founded and run a company before I would add that one other benefit of some investors is that they have the pattern recognition to know which problems are worth spending time on and which ones are not and once you
Speaker A
get the check from the investor the clock start stop s starts and you need to spend that money as efficiently as possible so if you're going down some rabbit hole worrying about some concern that's really a non-issue if the
Speaker A
inventure investor or other advisers can help you mitigate that by just saying that's a problem that money can solve that's a problem you to focus on and find a resource like an attorney to help you solve or that's one that you should
Speaker A
just you know set aside it's just a non-issue you're worrying about the wrong thing that's a you know part of the pool of advice that s investor might offer you but also just add more and more funds have platform teams so
Speaker A
there's you know varying degrees of um varying degrees of how much people want to provide in that regard how many resources they put behind that as a venture fund and accordingly also how much you just want to align expectations
Speaker A
prior to investment around what you do hope that they bring to the table or what that value might look like as a strategic investor often there's some combination of expertise we can lend access uh frequently there's you know a
Speaker A
lot of of resources that we might have as a large company that we can leverage on your behalf we can introduce you to people that can answer those kinds of questions we can help you get an integration that might be challenging
Speaker A
for a startup to get you know we can kind of Leverage that access on your behalf um we might also be able to support distribution it's it's just all about you know aligning on expectations as much as possible prior to investment
Speaker A
if you're looking for something Beyond kind of these you know base Baseline introductions that we're talking about all right I think we're going to wrap it up there and go to the break I thank you guys very much for listening
Speaker A
and your attention and great questions thank you to everybody in the panel you guys were great really really fun I hope you guys have an an amazing rest of the class so thank you guys all right and you know the amount of
Speaker A
information that you get here that you otherwise couldn't get is just astounding you know to get some real insights on how they think about Investments you know what they have to do from their side it's uh it's really
Speaker A
thank you very much for coming and especially on an evening in January when it's cold out so thank you we'll take a break and we'll be back at uh 7:35 to learn how to do those financial projections that will convince you that
Speaker A
they can be the big company that you need them to be so thank you [Music]
Topics:startup financingventure capitalfounder savingscredit cardsfriends and family fundingbank loansearly-stage investmentAngelListpeer-to-peer fundingentrepreneurship
